BUS502 Principles of Economics for Accountants- International Gold Mar
Questions:
Read the article and answer the questions in the spaces below. Use full sentences and complete the diagrams but do not use more space than is given here.
(1) “As soon as demand begins to overwhelm supply, then it’s “game on”. Complete the diagram below and explain the consequences of the above scenario on the gold market.
(2) According to Rickards “gold is a form of money”. With reference to the principal functions of money, to what extent is Rickards right.
(3) “This year we could see decrease in global production” Explain how, using the diagram below, this scenario would affect the price of gold.
(4) Based on the information provided in the article do you think that the gold market is a perfect competitive market Why or why not (Your answer should analyse the main points of this type of market).
Answers:
The figure has an equilibrium point where demand of gold is equal to its supply. This is at price P* and the quantity level is Q*. Since the demand is said to rise over the quantity supplied, the initial demand curve D shifts to a new demand curve Dn the direction shown by the arrows. The demand level rises from Q* to Qn. Since supply is inadequate to meet this demand increase, the suppliers have no other choice than to raise the price of their supplies; the change in price is from P* to Pn. so the consequences of gold demand exceeding gold supply is that in the gold market the price will rise.
(2) According to Rickards “gold is a form of money”. With reference to the principal functions of money, to what extent is Rickards right?
Rickards was right since just like money, gold is used as a store of value. Gold is a precious asset and thus more important as a store of value. Most importantly, it is better than money since it is not affected by changes in inflation rate (Stlouisfed.org, 2017). Due to the stability of gold in maintaining its purchasing power, it is used as a medium of exchange. The fact that gold is inert made it be used as an exchange medium (Boundless, 2017). Its popularity was increased by the fact that it was easily moved since even a small amount of gold has a big value. Its special chemical and physical properties ensures that gold has a constant value. Rickards have noted that there are gold paper contracts just like there are paper contracts for money. According to Ponnusamy (2016), for anything to be accepted as a form of money it has to be globally accepted. Gold is acceptable worldwide and thus Rickards can be said to have been right when he made the statement of gold being a form of money.
“Gold market”.
The figure has an equilibrium point where demand of gold is equal to its supply. This is at price P* and the quantity level is Q*. If there is a global decrease in gold production, there will be a shortage of supply and the equilibrium level will be distorted as the supply curve will shift to the left the direction represented by the arrows. The quantity of gold supplied will fall from Q* to Qn. the shortage will result in gold price rising from P* to Pn. Therefore the decrease of global gold production will impact the gold market by resulting in a higher gold price. It will have a similar effect as a rise in the gold demand holding supply constant.
(4) Based on the information provided in the article do you think that the gold market is a perfect competitive market? Why or why not? (Your answer should analyse the main points of this type of market).
No, the gold market is not a competitive market. According to Nipun (2016), in a competitive market, the number of buyers and sellers is very high which not the case for the gold market is; they are also smaller in size. Rickards (2017) noted that there are some major suppliers and buyers of gold in the labour market. This can be confirmed by the article’s argument that for instance 91 % of Swiss gold goes only to five destinations.
Another characteristic of a competitive market that is lacking in the case of gold market is that of the presence of perfect information (Whiting, 2017). Rickards pointed out that there isn’t sufficient information to help one in understanding the demand/supply situation of gold since some of the players of physical gold fail to report their gold holdings or purchases transparently. They are thus considered to be opaque players. Whereas the Swiss is transparent on their gold market activities, the Saudis and China have little transparency. Another characteristic of perfect competitive market is that there is sufficient supply which lacks in the gold market. The many sellers supply sufficient products in the perfect competitive market; but the article notes that there is a shortage of gold supply.
References
Boundless. (2017). The main functions of money are as a medium of exchange, a unit of account, and a store of value. Boundless. Retrieved 28 May 2017, from https://www.boundless.com/business/textbooks/boundless-business-textbook/the-functions-of-money-and-banking-21/money-as-a-tool-123/functions-of-money-568-3194/.
Nipun, S. (2016). Characteristics of a Perfect Competition | Market | Economics. Economics Discussion. Retrieved 29 May 2017, from https://www.economicsdiscussion.net/perfect-competition/characteristics-of-a-perfect-competition-market-economics/25618.
Ponnusamy, S. (2016). Functions of Money in the Modern Economic System. Owlcation. Retrieved 28 May 2017, from https://owlcation.com/social-sciences/Functions-of-Money-in-Modern-Economic-System
Rickards, J. (2017). Rising Demand, Falling Supplies Equals Higher Gold Prices. Daily Reckoning. Retrieved 29 May 2017, from https://dailyreckoning.com/rising-demand-falling-supplies-equals-higher-gold-prices/.
Stlouisfed.org. (2017). Functions of Money - The Economic Lowdown Podcast Series, Episode 9. Stlouisfed.org. Retrieved 28 May 2017, from https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-9-functions-of-money.
Whiting, B. (2017). Perfectly Competitive Market: Definition, Characteristics & Examples. Study.com. Retrieved 29 May 2017, from https://study.com/academy/lesson/perfectly-competitive-market-definition-characteristics-examples.html.
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